ACUITY INC. (DE) 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Acuity Brands, Inc. (referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries for the years ended August 31, 2021, 2020, and 2019 (“fiscal 2021,” “fiscal 2020,” and “fiscal 2019,” respectively). The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included within this report. Overview Company We are a market-leading industrial technology company. Through our two business segments, Acuity Brands Lighting and Lighting Controls (“ABL”) and the Intelligent Spaces Group (“ISG”) we design, manufacture, and bring to market products and services that make the world more brilliant, productive, and connected. We achieve growth through the development of innovative new products and services, including lighting, lighting controls, building management systems, and location-aware applications. We achieve customer-focused efficiencies that allow us to increase market share and deliver superior returns. We look to aggressively deploy capital to grow the business and to enter attractive new verticals. Capital Resources and Liquidity We have numerous sources of capital, including cash on hand and cash flows generated from operations as well as various sources of financing. Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to meet our capital allocation priorities, which are to reinvest in our organic growth, make strategic acquisitions and investments, pay dividends, and repurchase shares. Sufficient cash flow generation is also critical to fund our operations in the short and long-term, to make required contributions to our employee benefit plans, and to maintain compliance with covenants contained in our financing agreements. We believe that we will be able to meet our liquidity needs over the next 12 months based on our cash on hand, current projections of cash flows from operations, and borrowing availability under financing arrangements. Additionally, we believe that our cash flows from operations and sources of funding, including, but not limited to, future borrowings and borrowing capacity, will sufficiently support our long-term liquidity needs. In the event of a sustained market deterioration, we may need additional capital, which would require us to evaluate available alternatives and take appropriate actions. Cash Our cash position at August 31, 2021 was $491.3 million, a decrease of $69.4 million from August 31, 2020. Cash generated from operating activities, cash on-hand, and additional long-term debt borrowings were used during the current year to fund our capital allocation priorities as discussed below. We generated $408.7 million of cash flows from operating activities during fiscal 2021 compared with $504.8 million in the prior-year period, a decrease of $96.1 million, due primarily to increased operating working capital requirements to support the improvement in year-over-year sales as well as higher payments for income taxes, partially offset by payroll tax deferrals under the Coronavirus Aid, Relief, and Economic Security Act of 2020 and lower interest payments on long-term borrowings due to timing. Our significant contractual cash requirements as of August 31, 2021 include principal and interest on long-term debt as well as payments for operating lease liabilities. Our obligations related to these items are outlined in the Debt and Lines of Credit and Leases footnotes of the Notes to Consolidated Financial Statements within this Form 10-K. Additionally, we incur purchase obligations in the ordinary course of business that are enforceable and legally binding. Contractual purchase obligations for years subsequent to August 31, 2021 include $451.1 million in fiscal 2022. Contractual purchase obligations beyond fiscal 2022 are not significant. 19 Table of Contents Financing Arrangements During fiscal 2021, we received proceeds of $493.8 million through debt issuances and repaid $401.1 million of previously outstanding long-term debt, resulting in net proceeds of $92.7 million. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of our various financing arrangements, including the terms of our $400.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”) as well as the $500.0 million aggregate principal amount of 2.150% senior unsecured notes due December 15, 2030 (the “Unsecured Notes”). At August 31, 2021, our outstanding debt balance was $494.3 million compared to our cash position of $491.3 million. We were in compliance with all financial covenants under our financing arrangements as of August 31, 2021. At August 31, 2021, we had additional borrowing capacity under the revolving credit facility of $395.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the facility less the outstanding letters of credit of $4.1 million issued under the facility. As of August 31, 2021, our cash on hand combined with the additional borrowing capacity under the revolving credit facility totaled approximately $0.9 billion. The Unsecured Notes were issued by Acuity Brands Lighting, Inc., a wholly-owned subsidiary of Acuity Brands, Inc. The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Acuity Brands, Inc. and ABL IP Holding LLC, a wholly-owned subsidiary of Acuity Brands, Inc. The following tables present summarized financial information for Acuity Brands, Inc., Acuity Brands Lighting, Inc., and ABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in non-guarantors as of the dates and during the period presented (in millions): Summarized Balance Sheet Information August 31, 2021 August 31, 2020 Current assets $ 1,172.0 $ 1,152.6 Current assets due from non-guarantor affiliates 213.4 183.3 Non-current assets 1,391.7 1,416.0 Current liabilities 595.1 530.2 Non-current liabilities 815.7 723.8 Summarized Income Statement Information Year Ended August 31, 2021 Net sales $ 2,900.0 Gross profit 1,244.8 Net income 301.7 Capital Allocation Priorities Effective capital allocation is a key driver of stockholder value. Our capital allocation priorities are to invest in our business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases. Organic Growth Investments We invested $43.8 million and $54.9 million in fiscal 2021 and 2020, respectively, in property, plant, and equipment, primarily related to investments in tooling, new and enhanced information technology capabilities, equipment, and facility enhancements. We currently expect to invest approximately 1.5% of net sales on capital expenditures during fiscal 2022. Strategic Acquisitions and Investments We seek opportunities to strategically expand and enhance our portfolio of solutions. We invested in acquisitions of businesses, net of cash acquired, of $75.3 million and $303.0 million in fiscal 2021 and 2020, respectively. These acquisitions primarily included the following transactions: • On July 1, 2021, using cash on hand, we acquired certain assets and liabilities of ams OSRAM’s North American Digital Systems (“OSRAM DS”) business. This acquisition is intended to enhance our light emitting diode (“LED”) driver and controls technology portfolio and accelerate our innovation, expand our access to market through a more fulsome OEM product offering, and give us more control over our supply chain. 20 Table of Contents • On May 18, 2021, using cash on hand, we acquired all of the equity interests of Rockpile Ventures, an accelerator of edge artificial intelligence startups. Rockpile Ventures helps early-stage artificial intelligence companies drive co-engineering and co-selling partnerships with major cloud ecosystems, enabling faster adoption from proof-of-concept trials to market scale. • On September 17, 2019, using cash on hand and borrowings under available existing credit arrangements at that time, we acquired all of the equity interests of The Luminaires Group (“TLG”), a leading provider of specification-grade luminaires for commercial, institutional, hospitality, and municipal markets, all of which complement our dynamic lighting portfolio. TLG’s indoor and outdoor lighting fixtures are marketed to architects, landscape architects, interior designers, and engineers through five niche lighting brands: A-light™, Cyclone™, Eureka ® , Luminaire LED™, and Luminis ® . • On November 25, 2019, using cash on hand, we acquired all of the equity interests of LocusLabs, Inc (“LocusLabs”). The LocusLabs software platform supports navigation applications used on mobile devices, web browsers, and digital displays in airports, event centers, multi-floor office buildings, and campuses. Please refer to the Acquisitions footnote of the Notes to Consolidated Financial Statements for more information. Dividends We paid dividends on our common stock of $19.1 million ($0.52 per share) in fiscal 2021 and $20.8 million ($0.52 per share) in fiscal 2020, indicating a quarterly dividend rate of $0.13 per share. All decisions regarding the declaration and payment of dividends are at the discretion of the Board of Directors (the “Board”) and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant. Share Repurchases During fiscal 2021, we repurchased 3.8 million shares of our outstanding common stock for $434.9 million. As of August 31, 2021, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 3.8 million shares. We expect to repurchase shares on an opportunistic basis subject to various factors including stock price, Company performance, market conditions, and other possible uses of cash. The COVID-19 Pandemic The COVID-19 pandemic has resulted in intermittent worldwide government restrictions on the movement of people, goods, and services resulting in increased volatility in and disruptions to global markets. We remain committed to prioritizing the health and well-being of our associates and their families and ensuring that we operate effectively. We have implemented policies to screen associates, contractors, and vendors for COVID-19 symptoms upon entering our manufacturing, distribution, and open-office facilities in the United States, Mexico, and other locations as permitted by law. We have also implemented one-way traffic flows, additional cleaning requirements for common spaces, mandatory face coverings, hand sanitizer stations, socially-distanced workspaces, and self-serve pay stations within our cafeterias to mitigate the spread of the virus. Additionally, we have required certain employees whose job functions can be performed remotely to work primarily from home. The COVID-19 pandemic has had an adverse impact on our results of operations. The pandemic has caused reduced construction and renovation spending as well as a disruption in our supply chain for certain components, both of which negatively impacted our fiscal 2021 sales. In fiscal 2020 we experienced a limited number of temporary facility shutdowns due to government-mandated closures. Although our facilities are open and government-mandated restrictions have been gradually lifted, a resurgence in COVID-19 cases may lead to the reimposition of previously lifted business closure requirements, the imposition of new restrictions, or the issuance of new or revised local or national health guidance. We also continue to incur additional health and safety costs including expenditures for personal protection equipment and facility enhancements to maintain proper distancing guidelines issued by the Centers for Disease Control and Prevention. We have taken actions to reduce costs, including the realignment of headcount with current volumes, a limit on all non-essential employee travel, other efforts to decrease discretionary spending, and reductions in our real estate footprint. Additionally, we elected to defer certain employer payroll taxes as allowable under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act) signed into law on March 27, 2020. Half of these deferrals are due in December 2021, and the remaining deferrals are due in December 2022. Although we have implemented significant measures to mitigate further spread of the virus, our employees, customers, suppliers, and contractors may continue to experience disruptions to business activities due to potential 21 Table of Contents further government-mandated or voluntary shutdowns, general economic conditions, or other negative impacts of the COVID-19 pandemic. We are continuously monitoring the adverse effects of the pandemic and identifying steps to mitigate those effects. As the COVID-19 pandemic is continually evolving, we are uncertain of its ultimate duration and impact. See Part I, Item 1a. Risk Factors for further details regarding the potential impacts of COVID-19 to our results of operations, financial position, and cash flows. Results of Operations The following is a discussion of our results of operations in fiscal 2021 compared to fiscal 2020. A discussion of our fiscal 2020 results of operations compared to fiscal 2019 can be found within Part II, Item 7. Management's Discussion and Analysis within our fiscal 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 23, 2020. The following table sets forth information comparing the components of net income for the year ended August 31, 2021 with the year ended August 31, 2020 (in millions except per share data): Year Ended August 31, Increase Percent 2021 2020 (Decrease) Change Net sales $ 3,461.0 $ 3,326.3 $ 134.7 4.0 % Cost of products sold 1,986.0 1,923.9 62.1 3.2 % Gross profit 1,475.0 1,402.4 72.6 5.2 % Percent of net sales 42.6 % 42.2 % 40 bps Selling, distribution, and administrative expenses 1,044.1 1,028.5 15.6 1.5 % Special charges 3.3 20.0 (16.7) NM Operating profit 427.6 353.9 73.7 20.8 % Percent of net sales 12.4 % 10.6 % 180 bps Other expense: Interest expense, net 23.2 23.3 (0.1) (0.4) % Miscellaneous expense, net 8.2 5.9 2.3 NM Total other expense 31.4 29.2 2.2 7.5 % Income before income taxes 396.2 324.7 71.5 22.0 % Percent of net sales 11.4 % 9.8 % 160 bps Income tax expense 89.9 76.4 13.5 17.7 % Effective tax rate 22.7 % 23.5 % Net income $ 306.3 $ 248.3 $ 58.0 23.4 % Diluted earnings per share $ 8.38 $ 6.27 $ 2.11 33.7 % NM - not meaningful Net sales increased $134.7 million, or 4.0%, to $3.46 billion for the year ended August 31, 2021 compared with $3.33 billion reported for the year ended August 31, 2020. For the year ended August 31, 2021, we reported net income of $306.3 million compared with $248.3 million for the year ended August 31, 2020, an increase of $58.0 million, or 23.4%. For fiscal 2021, diluted earnings per share increased 33.7% to $8.38 from $6.27 for the prior-year period. The following table reconciles certain U.S. generally accepted accounting principles (“U.S. GAAP”) financial measures to the corresponding non-U.S. GAAP measures referred to in the discussion of our results of operations, which exclude the impact of acquisition-related items, amortization of acquired intangible assets, share-based payment expense, special charges associated primarily with continued efforts to streamline the organization, and impairments of investments in unconsolidated affiliates. Although the impacts of these items have been recognized in prior periods and could recur in future periods, management typically excludes these items during internal reviews of performance and uses these non-U.S. GAAP measures for baseline comparative operational analysis, decision making, and other activities. These non-U.S. GAAP financial measures, including adjusted gross profit and margin, adjusted selling, distribution, and administrative (“SD&A”) expenses and adjusted SD&A expenses as a percent of net sales, adjusted operating profit and margin, adjusted other expense, adjusted net income, and adjusted diluted earnings per share, are provided to enhance the user’s overall understanding of our current financial performance. Specifically, we believe these non-U.S. GAAP measures provide greater comparability and 22 Table of Contents enhanced visibility into our results of operations. The non-U.S. GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, results prepared in accordance with U.S. GAAP. (In millions, except per share data) Year Ended August 31, 2021 2020 Increase (Decrease) Percent Change Gross profit $ 1,475.0 $ 1,402.4 $ 72.6 5.2 % Percent of net sales 42.6 % 42.2 % 40 bps Add-back: Acquisition-related items (1) — 1.2 Adjusted gross profit $ 1,475.0 $ 1,403.6 $ 71.4 5.1 % Percent of net sales 42.6 % 42.2 % 40 bps Selling, distribution, and administrative expenses $ 1,044.1 $ 1,028.5 $ 15.6 1.5 % Percent of net sales 30.2 % 30.9 % (70) bps Less: Amortization of acquired intangible assets (40.7) (41.7) Less: Share-based payment expense (32.5) (38.2) Less: Acquisition-related items (1) (2.2) (1.3) Adjusted selling, distribution, and administrative expenses $ 968.7 $ 947.3 $ 21.4 2.3 % Percent of net sales 28.0 % 28.5 % (50) bps Operating profit $ 427.6 $ 353.9 $ 73.7 20.8 % Percent of net sales 12.4 % 10.6 % 180 bps Add-back: Amortization of acquired intangible assets 40.7 41.7 Add-back: Share-based payment expense 32.5 38.2 Add-back: Acquisition-related items (1) 2.2 2.5 Add-back: Special charges 3.3 20.0 Adjusted operating profit $ 506.3 $ 456.3 $ 50.0 11.0 % Percent of net sales 14.6 % 13.7 % 90 bps Other expense $ 31.4 $ 29.2 $ 2.2 7.5 % Less: Impairments of investments (6.0) — Adjusted other expense $ 25.4 $ 29.2 $ (3.8) (13.0) % Net income $ 306.3 $ 248.3 $ 58.0 23.4 % Add-back: Amortization of acquired intangible assets 40.7 41.7 Add-back: Share-based payment expense 32.5 38.2 Add-back: Acquisition-related items (1) 2.2 2.5 Add-back: Special charges 3.3 20.0 Add-back: Impairments of investments 6.0 — Total pre-tax adjustments to net income 84.7 102.4 Income tax effect (19.3) (23.4) Adjusted net income $ 371.7 $ 327.3 $ 44.4 13.6 % Diluted earnings per share $ 8.38 $ 6.27 $ 2.11 33.7 % Adjusted diluted earnings per share $ 10.17 $ 8.27 $ 1.90 23.0 % ______________________________ (1) Acquisition-related items include profit in inventory and professional fees. 23 Table of Contents Net Sales Net sales of $3.46 billion for the year ended August 31, 2021 increased by $134.7 million, or 4.0%, compared with the prior-year period. This increase was driven by improved sales performance in the second half of fiscal 2021. Sales in our ABL segment of $3.29 billion increased $106.4 million, or 3.3%, compared to the prior year. Within our ABL segment, sales through the independent sales network and direct sales network increased 5% and 9%, respectively, due primarily to these channels continuing to benefit from improved service levels and an improving economy. However, corporate accounts sales for fiscal 2021 were 12% lower year over year due to fewer nonessential renovations from large retailers in the first half of the fiscal year, and retail sales declined 17% due primarily to a customer inventory rebalancing in fiscal 2021. Sales within our ISG segment increased 21% to $190.0 million due primarily to strong demand for building and HVAC controls. Changes in foreign currency rates and revenues from acquired companies did not have a meaningful impact on net sales for fiscal 2021. Gross Profit Gross profit for fiscal 2021 increased $72.6 million, or 5.2%, to $1.48 billion compared with $1.40 billion for the prior year due. The increase in gross profit and margin was due primarily to increased sales as well as product and productivity improvements, partially offset by higher component and freight costs. Operating Profit SD&A expenses of $1.04 billion for the year ended August 31, 2021 increased $15.6 million, or 1.5%, compared with the prior year. The increase in SD&A expense was due primarily to higher outbound freight to support the increase in sales as well as increased employee-related costs, partially offset by lower travel expense and sales and marketing costs due to cost control and travel restrictions that have continued since the start of the COVID-19 pandemic. Additionally, share-based payment expense decreased in fiscal 2021 due to the discontinuation of certain retirement provisions in the equity incentive program that resulted in the acceleration of share-based payment expense for fiscal 2020 grants. Compared with the prior-year period, SD&A expenses as a percent of net sales decreased 70 basis points to 30.2% for fiscal 2021 from 30.9% in fiscal 2020. Adjusted SD&A expenses were $968.7 million, or 28.0% of net sales, in fiscal 2021 compared to $947.3 million, or 28.5% of net sales, in the year-ago period. During the year ended August 31, 2021, we recognized pre-tax special charges of $3.3 million compared with pre-tax special charges of $20.0 million recorded during the year ended August 31, 2020. Further details regarding our special charges are included in the Special Charges footnote of the Notes to Consolidated Financial Statements . Operating profit for fiscal 2021 was $427.6 million compared with $353.9 million reported for the prior-year period, an increase of $73.7 million, or 20.8%. Operating profit margin increased 180 basis points to 12.4% for fiscal 2021 compared with 10.6% for fiscal 2020. The increase in operating profit margin reflects favorable gross profit margin, a decline in special charges, and our ability to leverage our operating costs. Adjusted operating profit increased $50.0 million, or 11.0%, to $506.3 million compared with $456.3 million for fiscal 2020. Adjusted operating profit margin was 14.6% and 13.7% for fiscal 2021 and 2020, respectively. Other Expense Other expense consists of net interest expense and net miscellaneous expense, which includes non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses. Interest expense, net, was $23.2 million and $23.3 million for the years ended August 31, 2021 and 2020, respectively. We reported net miscellaneous expense of $8.2 million in fiscal 2021 compared with $5.9 million in fiscal 2020. During fiscal 2021, we recorded impairment charges totaling $6.0 million for certain unconsolidated equity investments. Further details regarding the impairment charges are included in the Fair Value Measurements footnote of the Notes to Consolidated Financial Statements . Income Taxes and Net Income Our effective income tax rate was 22.7% and 23.5% for the years ended August 31, 2021 and 2020, respectively. The change in our effective income tax rate year over year is due primarily to the impacts of discrete items. Further details regarding income taxes are included in the Income Taxes footnote of the Notes to Consolidated Financial 24 Table of Contents Statements . We estimate that our effective tax rate for fiscal 2022 will be approximately 23% before any discrete items, assuming the rates in our taxing jurisdictions remain generally consistent throughout the year. Net income for fiscal 2021 increased $58.0 million, or 23.4%, to $306.3 million from $248.3 million reported for the prior year. The increase in net income resulted primarily from an increase in operating profit compared to the prior-year period partially offset by higher income tax expense related to the increase in profit. Adjusted net income for fiscal 2021 increased 13.6% to $371.7 million compared with $327.3 million in the year-ago period. Diluted earnings per share for fiscal 2021 was $8.38 compared with $6.27 for the prior-year period, an increase of $2.11, or 33.7%. This increase reflects higher net income as well as lower outstanding diluted shares. Adjusted diluted earnings per share for fiscal 2021 was $10.17 compared with $8.27 for the prior-year period, an increase of $1.90, or 23.0%. Segment Results The following tables set forth information comparing the operating results of our segments, ABL and ISG, for the year ended August 31, 2021 with the year ended August 31, 2020 (in millions). We have recast historical information to conform to the current segment structure. Year Ended August 31, ABL 2021 2020 Increase (Decrease) Percent Change Net sales $ 3,287.3 $ 3,180.9 $ 106.4 3.3 % Operating profit $ 476.2 $ 425.8 $ 50.4 11.8 % Add-back: Amortization of acquired intangible assets 27.9 27.4 Add-back: Share-based payment expense 11.0 13.4 Add-back: Acquisition-related items (1) — 1.2 Adjusted operating profit $ 515.1 $ 467.8 $ 47.3 10.1 % Operating profit margin 14.5 % 13.4 % 110 bps Adjusted operating profit margin 15.7 % 14.7 % 100 bps _____________________________ (1) Acquisition-related items include profit in inventory. ABL net sales for the year ended August 31, 2021 increased 3.3% compared with the prior-year period due primarily to improvements within the independent sales network and direct sales network channels as our go-to-market activities leveraged improvements in the construction market and wider economy. These gains were partially offset by lower sales in the retail channel due to a customer inventory rebalancing and in the corporate accounts channel due to fewer nonessential renovations from large retailers in the first half of the fiscal year. Operating profit for ABL was $476.2 million (14.5% of ABL net sales) for the year ended August 31, 2021 compared to $425.8 million (13.4% of ABL net sales) in the prior-year period, an increase of $50.4 million. The increase in operating profit was due primarily to higher sales as well as product and productivity improvements, partially offset by higher component, freight, and operating costs. The operating profit margin increase year over year reflects higher sales as well as our ability to successfully leverage our operating costs. Adjusted operating profit for ABL increased $47.3 million to $515.1 million for the year ended August 31, 2021 compared with the prior year period. Year Ended August 31, ISG 2021 2020 Increase (Decrease) Percent Change Net sales $ 190.0 $ 157.0 $ 33.0 21.0 % Operating profit (loss) $ 9.9 $ (3.9) $ 13.8 NM Add-back: Amortization of acquired intangible assets 12.8 14.3 Add-back: Share-based payment expense 2.9 4.5 Adjusted operating profit $ 25.6 $ 14.9 $ 10.7 71.8 % Operating profit (loss) margin 5.2 % (2.5) % 770 bps Adjusted operating profit margin 13.5 % 9.5 % 400 bps ISG net sales for the year ended August 31, 2021 increased 21.0% compared with the prior-year period driven primarily by strong demand for building and HVAC controls. ISG operating profit was $9.9 million for the year ended 25 Table of Contents August 31, 2021 compared with a $3.9 million operating loss in the prior-year period, an increase of $13.8 million. This increase was due primarily to higher sales, partially offset by increased employee costs. Adjusted operating profit for ISG increased $10.7 million to $25.6 million for the year ended August 31, 2021 compared with the prior-year period. Outlook We expect the challenging global supply chain environment to continue into fiscal 2022. We currently expect ABL to grow net sales in the high single digits for the full year of 2022 and ISG to deliver net sales growth in the mid-teens. Additionally, we expect a 42% plus annualized gross profit margin for the full year of 2022, and we believe that we can continue to leverage our operating costs as we increase net sales. Accounting Standards Adopted in Fiscal 2021 and Accounting Standards Yet to Be Adopted See the New Accounting Pronouncements footnote of the Notes to Consolidated Financial Statements for information on recently adopted and upcoming standards. Critical Accounting Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition and results of operations as reflected in our Consolidated Financial Statements , which have been prepared in accordance with U.S. GAAP. As discussed in the Description of Business and Basis of Presentation footnote of the Notes to Consolidated Financial Statements , the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on our substantial historical experience and/or other relevant factors, such as projections of future performance, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We discuss the development of accounting estimates with our Audit Committee of the Board of Directors on a recurring basis. See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for a summary of our accounting policies. We believe the following accounting topics represent our critical accounting estimates. Revenue Recognition We recognize revenue when we transfer control of goods and services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for goods and services. In the period of revenue recognition, we estimate and record provisions for certain rebates, sales incentives, product returns, and discounts to customers, in most instances, as reductions of revenue. We also maintain one-time or on-going marketing and trade-promotion programs with certain customers that require us to estimate and accrue the expected costs of such programs. Generally, these items are estimated based on customer agreements, historical trends, and expected demand. For sales with multiple deliverables, significant judgment may be required to determine which performance obligations are distinct and should be accounted for separately. We allocate the expected consideration to be collected to each distinct performance obligation based on its standalone selling price. Standalone selling price is generally estimated using a cost plus margin valuation when no observable input is available. Actual results could differ from estimates, which would require adjustments to recorded amounts. Please refer to the Revenue Recognition footnote of the Notes to Consolidated Financial Statements for additional information regarding estimates related to revenue recognition. Inventories Inventories include materials, direct labor, in-bound freight, customs, duties, tariffs, and related manufacturing overhead and are stated at the lower of cost (on a first-in, first-out or average-cost basis) and net realizable value. We review inventory quantities on hand and record a provision for excess or obsolete inventory primarily based on estimated future demand and current market conditions. A significant change in customer demand, market conditions, or technology could render certain inventory obsolete and thus could have a material adverse impact on our operating results in the period the change occurs. 26 Table of Contents Goodwill and Indefinite-Lived Intangible Assets Indefinite-lived intangible assets consist of trade names acquired through multiple acquisitions that are expected to generate cash flows indefinitely. Significant estimates and assumptions were used to both identify and determine the initial fair value of these acquired intangible assets, often with the assistance of third-party valuation specialists. These assumptions include, but are not limited to, estimated future net sales and profitability, customer attrition rates, royalty rates, and discount rates. Goodwill is calculated as the residual value of an acquisition's purchase price less the value of the identifiable net assets and is thus dependent on the appropriate identification and valuation of the net assets obtained in an acquisition. We also review goodwill and indefinite-lived intangible assets for impairment on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that would more likely than not indicate that the fair value of the goodwill or an indefinite-lived asset is below its carrying value. An impairment loss for goodwill or an indefinite-lived intangible asset would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or another appropriate fair value method. The evaluation of goodwill and indefinite-lived intangibles for impairment requires management to use significant judgments and estimates in accordance with U.S. GAAP including, but not limited to, economic, industry, and Company-specific qualitative factors, projected future net sales, operating results, and cash flows. Although we currently believe that the estimates used in the evaluation of goodwill and indefinite-lived intangibles are reasonable, differences between actual and expected net sales, operating results, and cash flows and/or changes in the discount rates or theoretical royalty rates used could cause these assets to be deemed impaired. If this occurs, we are required to record a non-cash charge to earnings for the write-down in the value of such assets. Such charges could have a material adverse effect on our results of operations and financial position but not our cash flows from operations. Goodwill We perform our goodwill impairment analysis at the reporting unit level using a combination of discounted future cash flows and relevant market multiples. Our discounted cash flow analyses required significant assumptions about discount rates, short and long-term growth rates, and future profitability. We utilized estimated discount rates ranging from 9.0% to 12.0% as of June 1, 2021, based on the Capital Asset Pricing Model, which considers the risk-free interest rate, beta, market risk premium, and size premium to determine an appropriate discount rate for a reporting unit. Short-term growth rates were based on management’s forecasted financial results, which consider key business drivers such as specific revenue growth initiatives, market share changes, growth in our addressable market, and general economic factors such as macroeconomic conditions, credit availability, and interest rates. Short-term growth rates used in the fiscal 2021 impairment analysis reflected additional estimation uncertainty as a result of the COVID-19 pandemic. We calculated the discounted cash flows attributable to our reporting units for a 10-year discrete period with a terminal value and compared this calculation to the discounted cash flows generated over a 40-year period to corroborate the reasonableness of assumptions used. The long-term growth rate used in determining terminal value was estimated at 3.5% and was primarily based on our understanding of projections for expected long-term growth in our addressable market and historical long-term performance. We corroborate the values determined from our discounted cash flow models using a relevant market multiple, generally published earnings and/or revenue multiples. We also reconcile the sum of the fair values for each reporting unit to our market capitalization at the testing date, including consideration of a control premium. Any reasonably likely change in the assumptions used in these analyses, including revenue growth rates, the discount rates, long-term growth rates, or relevant multiples would not cause the carrying value of any reporting unit to exceed its estimated fair value as determined under the goodwill impairment analysis. See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for further details. Indefinite-Lived Intangible Assets Our indefinite-lived intangible assets consist of 13 trade names with an aggregate carrying value of $174.8 million at August 31, 2021. We utilized significant assumptions to estimate the fair value of these indefinite-lived trade names using a fair value model based on discounted future cash flows (“fair value model”) in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). Future cash flows associated with each of our indefinite-lived trade names are calculated by multiplying a theoretical royalty rate a willing third party would pay for use of the particular trade name by estimated future net sales attributable to the relevant trade name. The present values of the resulting after-tax cash flows is our current estimate of the fair value of each trade name. 27 Table of Contents This fair value model requires us to make several significant assumptions, including specific estimated future net sales (including short and long-term growth rates), the royalty rate, and the discount rate for each trade name. Future net sales and short-term growth rates are estimated for each particular trade name based on management’s financial forecasts, which consider key business drivers, such as specific revenue growth initiatives, market share changes, expected growth in our addressable market, and general economic factors, such as macroeconomic conditions, credit availability, and interest rates. Short-term growth rates used in the fiscal 2021 impairment analysis reflected additional estimation uncertainty as a result of the COVID-19 pandemic. The long-term growth rate used in determining terminal value was estimated at 3.5% and was based primarily on our understanding of projections for expected long-term growth for our addressable market and historical long-term performance. The theoretical royalty rate is estimated primarily using management’s assumptions regarding the amount a willing third party would pay to use the particular trade name and is compared with market information for similar intellectual property within and outside of the industry. If future operating results are unfavorable compared with forecasted amounts, we may be required to reduce the theoretical royalty rate used in the fair value model, which would result in lower expected future after-tax cash flows in the fair value model. We utilized a range of estimated discount rates between 9% and 12% as of June 1, 2021, based on the Capital Asset Pricing Model, which considers the current risk-free interest rate, beta, market risk premium, and size premium appropriate for each intangible. During fiscal 2021, we performed an evaluation of the fair values of our indefinite-lived trade names . Our expected revenues were based on our fiscal 2022 projections and recent third-party lighting, controls, and building technology solutions market growth estimates for fiscal 2023 through 2025 as of June 1, 2021. We also included revenue growth estimates based on current initiatives expected to help improve performance. During fiscal 2021, estimated theoretical royalty rates ranged between 1% and 3%. The impairment analyses of our indefinite-lived intangible assets indicated that their fair values exceeded their carrying values; therefore, no impairments were recorded for fiscal 2021. Any reasonably likely change in the assumptions used in the analyses for our trade names, including revenue growth rates, royalty rates, and discount rates, would not be material to our financial condition or results of operations. See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for further details. Share-based Payment Expense We recognize compensation cost for share-based payment transactions in the financial statements under the provisions of ASC Topic 718, Compensation — Stock Compensation (“ASC 718”). Restricted stock awards, performance stock awards, and director stock units representing certain deferrals into the Director Deferred Compensation Plan are valued based on the fair value of our common stock on the grant date. We review the values of our performance awards on a frequent and recurring basis and adjust those values based on the probability that the related performance metric will be satisfied. We utilize the Black-Scholes model in deriving the fair value estimates of our stock option awards that only have a service requirement, and we utilize the Monte Carlo simulation model to determine grant date fair value estimates of stock options also subject to a market condition. Additionally, we estimate forfeitures of all share-based awards at the time of grant, which are revised in subsequent periods if actual forfeitures differ from initial estimates. Forfeitures are estimated based on historical experience. If factors change causing different assumptions to be made in future periods, estimated compensation expense may differ significantly from that recorded in the current period. We generally recognize compensation cost for share-based payment transactions on a straight-line basis over an award's requisite service period as defined by ASC 718. In certain circumstances, such as when a performance award is subject to graded vesting, we apply the accelerated attribution method to recognize compensation cost related to our share-based payment awards. See the Share-based Payments footnote of the Notes to Consolidated Financial Statements for further information on these awards, including assumptions used in estimating the fair value of our awards. Product Warranty and Recall Costs Our products generally have a standard warranty term of five years. We accrue for the estimated amount of future warranty costs when the related revenue is recognized. Estimated future warranty costs are primarily based on historical experience of identified warranty claims. We are fully self-insured for product warranty costs. Historical warranty costs have been within expectations. Although we expect that historical activity will continue to be the best indicator of future warranty costs, there can be no assurance that future warranty costs will not exceed historical amounts. Estimated costs related to product recalls based on a formal campaign soliciting repair or return of that product are accrued when they are deemed to be probable and can be reasonably estimated. If actual future 28 Table of Contents warranty or recall costs exceed recorded amounts, additional accruals may be required, which could have a material adverse impact on our results of operations and cash flow. We also sell certain service-type warranties that extend coverages for products beyond their base warranties. We account for service-type warranties as distinct performance obligations, allocate an appropriate amount of transaction price to these transactions, and recognize revenue for these contracts ratably over the life of the additional warranty period. We allocate transaction price to our service-type warranties largely based on expectations of cost plus margin based on our estimate of future claims. These estimates are subject to a higher level of estimation uncertainty than other estimates, as we have less experience in costs in the extended warranty period. Claims related to service-type warranties are expensed as incurred. Cautionary Statement Regarding Forward-Looking Statements and Information This filing contains forward-looking statements within the meaning of the federal securities laws. Statements made herein that may be considered forward-looking include statements incorporating terms such as “expects,” “believes,” “intends,” “anticipates,” and similar terms that relate to future events, performance, or results of the Company. In addition, the Company, or the executive officers on the Company’s behalf, may from time to time make forward-looking statements in reports and other documents we file with the U.S. Securities and Exchange Commission or in connection with oral statements made to the press, current and potential investors, or others. Forward-looking statements include, without limitation: (a) our projections regarding financial performance, including our expected margins and ability to leverage operating costs, liquidity, capital structure, capital expenditures, investments, share repurchases, and dividends; (b) external and internal forecasts projecting the North American lighting and building management solutions market growth rate and growth in our addressable market; (c) expectations about the impact of any changes in demand, including improvements in our end markets, as well as volatility, challenges, competition, and uncertainty in general economic conditions; (d) expectations about volatility in raw material costs, freight costs, and component and labor availability; (e) our ability to execute and realize benefits from initiatives related to streamlining our operations and integrating recent acquisitions, realize synergies from acquisitions, capitalize on growth opportunities with the intention of becoming a larger, more dynamic company, and introduce innovative products and services; (f) our estimate of our fiscal 2022 effective income tax rate, results of operations, cash flows, and capital spending; (g) our estimate of future amortization expense; (h) our ability to achieve our long-term financial goals and measures; (i) the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies; (j) our expectations about the resolution of securities class action and other regulatory matters; (k) our expectations of the impact of the ongoing COVID-19 pandemic; (l) our human capital initiatives in fiscal 2022, and (m) our ability to reduce our carbon output and seize market opportunities related to sustainability. You are cautioned not to place undue reliance on any forward looking statements, which speak only as of the date of this annual report. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. Our forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the historical experience of the organization and management’s present expectations or projections. These risks and uncertainties include, but are not limited to, customer and supplier relationships and prices; competition; ability to realize anticipated benefits from initiatives taken and timing of benefits; market demand; litigation and other contingent liabilities; and economic, political, governmental, and technological factors that have affected us as a company. Also, additional risks that could cause our actual results to differ materially from those expressed in our forward-looking statements are discussed in Part I, Item 1a. Risk Factors of this Annual Report on Form 10-K, and are specifically incorporated herein by reference. The industry and market data contained in this report are based either on management’s own estimates or, where indicated, independent industry publications, reports by governmental agencies, or market research firms or other published independent sources and, in each case, are believed by our management to be reasonable estimates. However, industry and market data are subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in any statistical survey of market shares. We have not independently verified market and industry data from third-party sources. 29 Table of Contents